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It was the worst day for stocks since August 14. All three indexes had been on track to break a three-week long losing streak at the start of the day, but the selloff didn't allow for that. It was the fourth down-week in a row for all three, according to Refintiv.

In response, President Trump tweeted he "will be responding to China's tariffs this afternoon."

"We don't need China and, frankly, would be far better off without them," he said. He also "ordered" American companies "to immediately start looking for an alternative to China."

Besides stocks, other financial assets also dropped.

US oil futures settled down 2.1% at $54.17 a barrel, according to CME, on the back of the threatened tariffs on oil imports.

The US dollar, measured by the ICE U.S. Dollar Index, dropped 0.5%, and the yield on the 10-year US Treasury rate fell to 1.53%. The yield curve again inverted Friday, meaning that shorter-dated 2-year bonds yield more than longer-dated 10-year bonds. This has been a historic recession indicator.

The market's volatility gauge, the CBOE Volatility Index, or Vix, shot up by some 20%, and CNN's Fear and Greed index moved from 'fear' to 'extreme fear'.

The trade spat overshadowed the annual Federal Reserve symposium at Jackson Hole, at which Fed Chairman Jerome Powell reaffirmed his pledge to act as 'appropriate' in the eye of tricky economic conditions.

Expectations for a September rate cut are at 100%, with a 90% chance for a quarter-percentage point cut, according to the CME's FedWatch tool.

Trump, who has long called on the Fed to cut interest rates more aggressively, tweeted "as usual, the Fed did NOTHING." He added "my only question is, who is our bigger enemy, Jay Powell or Chairman Xi," referring to China's President Xi Jinping."

One analyst called the remarks a "blistering outburst."

"The market is speculating whether Trump will take direct action to weaken the greenback," said Jane Foley, senior FX strategist at Rabobank in a note. "This would mark a significant change in policy for the US Treasury and would undoubtedly be met with significant criticism from other G7 nations."

Dan Suzuki, portfolio strategist at Richard Bernstein Advisors, said "Things are escalating in the wrong direction."

"It is negative you have this growing pressure that makes the Fed's job a bit more complicated and slightly increases the pressure to try to remove Jay Powell," Suzuki said.

Earlier in the day, St. Louis Fed President James Bullard talked monetary policy as the day in Jackson Hole is getting under way. Bullard spoke out in favor of interest rate cuts on CNBC given the recent inversion of the Treasury yield curve.